Insurance

Definition - What does Insurance mean?

Insurance is a financial arrangement in which one party pays another to protect itself from a particular loss. Insurance companies collect small payments from a large group of customers every month. These payments are known as insurance premiums. They use statistical analysis to determine what their losses might be and determine a rate for the premiums in order to stay profitable and cover any losses. When an insured party experiences a loss, the insurance company pays for it using money collected from all of its customers.

Insuranceopedia explains Insurance

There is a wide range of different insurance policies, including health, life, car, homeowner, and disability. Each one leverages the same type of insurance arrangement to cover different risks.

For insurance to be possible for a risk, a few different conditions are required. First, a large number of people must be willing to buy insurance so they can spread the risk. Second, the losses from the risk need to be significant; otherwise, it would not make sense for people to buy insurance. Third, the losses need to be rare. If not, it would be too expensive to provide coverage. Finally, the insurance company must be able to analyze the risk of the loss. Any insurance market has to meet these conditions.

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